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Cisco's Boom and Bust: a History Lesson

Stocks in this article: CSCO HPQ JNPR

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Given the way the market was saturated with its networking gear, it was smart of Cisco to seek out fresh sources of revenue. Less forgivable, however, is Cisco's apparent blind-siding by the market's rapid shift towards lower-pricing switches; switching accounts for almost a third of its overall revenue, and Cisco prides itself on exploiting major market transitions. If the company had paid more attention to switching -- and less to consumer products -- analysts say it would be in a much more favorable position today.

"The late nineties networking boom was driven by Internet euphoria and Y2K fear that resulted in an excess capacity and excess inventory," said Jayson Noland, an analyst at Robert W. Baird. "Unlike the late nineties, Cisco investors are currently concerned with the competitive threat of larger, more cost advantaged rivals and smaller, much higher-growth innovators."

One rival, HP (HPQ), is now using better prices to close the market gap. Juniper (JNPR), a newly public firm when the dot-com bubble burst, is also going after Cisco, albeit with a higher-end class of networking gear.

What Needs to Change

In 2002, CEO Chambers oversaw the transition and remained at the helm of the reborn company. This time, say analysts, that needs to change.

"My guess is Chambers won't be the CEO who identifies the new corporate initiatives going forward," said Marshall. "Recall that John Chambers has been CEO of Cisco longer than its main competitor Juniper has been in business -- 16 years versus 15 years, respectively."

Marshall is not alone in this opinion. In a recent poll, more than 65% of TheStreet readers said that Chambers should step down from the company and make room for new blood.

He was, after all, instrumental in Cisco's expansion into alternative markets. While his first moves to grow the behemoth beyond routing and switching were lucrative -- edging into the security, wireless and IP telephony sectors helped double Cisco's annual revenue between 2002 and 2010 -- subsequent strategies, like the $590 million purchase of Flip video camera maker Pure Digital in 2009, made less sense.

As a result, consolidation is now the key to Cisco's future; Chambers has already shuttered Flip and is transferring 5,000 employees at the company's troubled cable box unit to contract manufacturer Foxconn.

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